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FINRA’s Warning About Buying Privately Traded REITs

FINRA’s Warning About Buying Privately Traded REITs

FINRA, the quasi-independent board that regulates brokerage firms and investment advisors, warns investors about investments it believes are being misrepresented. The newest warning is about privately-traded REITs. FINRA warns investors that these investments are not liquid, do not guarantee income, and are sold because the brokers receive larger commissions for selling these investments than for almost any other investment product.

In May 2013, FINRA wrote a formal Notice to its Member Firms warning them that they must make sure their brokers completely disclose the following information when recommending privately-traded REITs or DPP (Direct Private Placements) to a client:

  • Brokers must explain that these investments are not listed on a stock exchange and cannot be easily sold
  • Brokers must tell clients that these investments are in “programs” and not in actual real estate or any other assets the program owns
  • Brokers must disclose the risks and can’t simply give a client a prospectus
  • Brokers must explain that distributions from these may simply include return of the client’s own money, not “income”
  • Brokers must explain that because distributions might include principal, the program will have less money to invest
  • Brokers need to share that because distributions are not guaranteed, they are not “income-generating” programs

The reason FINRA has taken this extraordinary step to warn investors and brokerage firms is due to it being aware of the enormous marketing programs under which billions of dollars of these programs have been sold to investors.

Privately-traded REITs are popular with brokers because they typically pay 6-9% commissions, but they are not suitable for most investors.

Unlike bonds, they do not guarantee any income. Unlike publicly-traded REITs that are listed on a stock exchange, they cannot easily be sold for a reasonable price. Unlike stocks, they will not increase in value unless they are eventually listed on a stock exchange.

Despite their large internal fees, they have managed to be attractive to investors, generally due to broker misrepresentation.

The Regulatory Notice and Investor Alert are at For more information about any REIT that you own or are considering buying, please contact Diane Nygaardby calling (913) 485-5014.

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